If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the month “April, 2012”

The USA is currently the envy of Europe. Its economy is expected to grow by around 2% this year according to the IMF, favourably comparing to the Euro area, where it is predicted there will be a small recession. Even a country like Germany, known for their good finances, is only expected to grow by around 1%. But the difference is that while the eurozone has come to grips with its debt and has been applying austerity measures in most of its countries, the USA has successfully put off any such talk. Whether this is a successful strategy for the EU is up for grabs, as debt reduction has seemingly overtaken growth as the number one target, a policy that has seen the UK and Spain both drop back into recession when a strong recovery should have been taking place. Nevertheless, the USA has an bump in the road coming up that could topple its recovery.

An Uncertain road ahead

Last year, after the USA hit their debt ceiling (a cap on the amount the government can borrow), a debate over increasing the barrier enveloped America. A complex deal was reached where tax increases and spending cuts were postponed till the end of this year, costing the USA their AAA credit status with Standard and Poor. This “Taxmageddon” date will prove costly unless Congress can come up with a deal beforehand, unlikely with a Republican dominated Congress up against a Democratic President – as Barack Obama will have to sign off on any new deal.

The biggest tax increase since 1968.

A range of problems await the USA at the end of the year; an expire of Bush’s tax cuts, a range of spending cuts from last year’s deal, the end of short-term boosts to the economy (e.g. the payroll-tax holiday worth $100 billion a year) and a new debate over another increase of the debt ceiling (already at $16.4 trillion). All this adds up to a $500 billion cut to America’s economy, roughly around 3-5% of GDP, more than enough to tip America back into recession. It doesn’t help that this is an election year, meaning the limelight will be placed on Barack Obama and Mitt Romney’s presidential campaigns rather than this impending crisis. More still, the Republican dominated Congress may wait to see if Mitt Romney can win the election rather than to try and negotiate with Obama once again, resulting in even less time to untangle this web of debt.

Shows the cost of the new tax increases on America’s economy

America will have to deal with this “Fiscal Cliff”, any sidestepping of the issue will lead to even more debt and the possibility of a further downgrading in credit status, as their inability to deal with their debt is confirmed. But maybe allowing the spending cuts to take place would be good for America in the long run; they are cuts across the board and would help ensure a reduction in the budget deficit. It would result in a big fiscal contraction at the start of next year, but would sort out all the mess that the dysfunctional structure of Washington enables.

The USA is heading for a cliff, how big the drop ends up being is down to Congress.

With the first round of the elections for the new French President done and dusted, now seems a good time to look at the two main contestants; Nicolas Sarkozy and François Hollande. Sarkozy is the current president and has received his fair share of blame for France’s troubles in the market. The French economy has stumbled and their downgrading by Standard & Poor in January summed up the lack of confidence from outside investors. But more than that, there is a feeling Sarkozy is just not well liked by the French people, he comes off as arrogant and out of touch, with his private life counting against him. This can be unfair on a president that has actually fared okay in tough times; he steered France through a difficult period during the euro crisis, pushed through an unpopular rise in the retirement age and has been active in important international conflicts – jointly leading the intervention in Libya. But his campaign has been poorly executed, he has tried to be perceived as the underdog (when already holding the presidential position) has ignored any talk of economic reforms (a trending policy in the rest of Europe) and has failed to trap Hollande (his biggest opponent) into discussing any policies of his own. He has focused too much on protectionism and immigration, where he has threatened to battle globalisation (surely too late) and to leave Europe’s passport free zone.

Sarkozy

Hollande is the Socialist candidate and current favourite, whose campaign consists of two main ideas; a tax increase on the rich to 75% of their income and an anti-Sarkozy message. The first idea might grab the general public, where the rich and bankers have become scapegoats for their current troubles (justifiably or not), but the practical implications will leave France worse off. Any individual or company that falls into this tax will simply move across the border to other countries where the tax rate is considerably less – the UK top income-tax rate will be 45%. The second idea is smart and focuses on the idea that the French people want Sarkozy out more that they want him in power. Hollande has ignored talks of true economic reform too, but by trashing Sarkozy’s past economic performance he can quietly push those concerns under the rug.

Hollande

The first round saw Hollande win with 28.4% and Sarkozy finish second with 25.5%, though the second round will be the most important and could go either way still. If Sarkozy doesn’t win this election, he will be only the second president in the fifth republic to not win re-election. Holland leads the polls for the second round, but the live debates could tip in Sarkozy’s favour as he has previous experience on TV and a willingness to expose Hollande on his policies without distractions.

First round results

The main issue to be discussed in these debates will be the economy. The French economy still remains strong; with an educated workforce, strong manufacturing in high end products and excellent private companies (with more firms in the Fortune 500 than any other European nation). But the country faces big problems; with unemployment high at around 10%, exports struggling against neighbour and rival Germany, public debt to GDP ratio at 90%, public spending at 56% of GDP (highest in eurozone) and undercapitalised banks. These issues need major reforms and France sticks out like a sore thumb in Europe as the only nation not taking drastic changes. France also has important sway in the EU and if they were to crash, it would have a much bigger effect on the euro than Greece’s recent crisis.

Unemployment uncomfortably high

Whichever president wins the elections will face big changes, even if neither is willing to admit it, and France will have to endure some tough times before the going can get good again. Is it what the French Fancy? Probably not, but it is what they need.

First up is Sony, the Japanese technology giant. Once known for its market leading products, they have struggled in recent times with a predicted loss of 520 billion yen ($6.5 billion) in this next fiscal year and a planned cutting of 10,000 jobs. This would be the company’s biggest ever loss in its history and has seen shares fall by up to 40%. One of the problems has been a decline in the TV industry, where they have been losing money for the last eight years and lost $2.2 billion last year. Sony are leaning towards a policy of slowly withdrawing from this market with the firm already stating it has halved its target for TV production and is focusing on gaming, cameras and mobile phones. But Sony is also making a loss on each PS3 it sells (hoping to make it up by pricing games high) with it estimated that they lost around $300 on each console they sold when the product first came out. Its telling that Microsoft are able to produce their consoles for less and can therefore make a profit on each XBOX, showing Sony aren’t being forced into this surprising strategy. Add to this that the XBOX outsold PS3’s by over 1.7 million units last year and it shows a failing strategy for a product that is accepted to be the best on the market right now but too highly priced. Problems with Japan haven’t helped, like the natural disasters and stronger yen and Sony will need to re structure there company to get back on track, maybe by dropping some of its product ranges.

Sony need to improve sales in their core products.

Nokia are another technological giant facing big trouble, as they struggle to compete with Android and the ever growing Apple. They have had to issue yet another profit warning recently and their newest product, the Lumia 900 has already been found to have a crucial fault (a problem with the devices internet connection). Poor showings in emerging markets have undermined Nokia and a 70% drop in sales to China since last year has been a big blow. They were late to join the tablet computer faze and their smart phones find it hard to compete with Apple and Samsung. In the first quarter of this year, Nokia saw sales decline by 40% and suffered a net loss of $1.2 billion, with blame pointed towards highly competitive markets pushing down prices. But really mismanagement has seen Nokia lose their innovation and they have failed to challenge Apple due to both the popularity of the app market and the windows operating system not taking off as predicted (though that could change with the new Windows 8 system soon to come out).

Nokia’s future could depend on the success of Windows 8.

Tesco is another firm that is struggling hard in the market right now. The supermarket giant has seen its share in the market slump to a seven year low, with customers either leaving for up market stores (Waitrose) or cheaper options (Aldi, Lidl). Tesco’s shares have dropped by 22% since last year, its trading profits in the UK have fallen by 1% and a bleak Christmas (the busiest period of the year) has seen the first profit warning for Tesco in modern times. Critics have pointed to out-of-date stores, a poor discount range, a £500 million “price drop” campaign that backfired (emphasising low quality rather than low price), a neglect of the UK market while concentrating on foreign markets (with its US business slumping)and too much diversification away from groceries. This has lead Tesco to announce a £1 billion revamp of its UK operations and they will need to concentrate on their core business by investing in its stores and offering better value for fair values to an austerity ridden UK.

The campaign that backfired, losing Tesco market share.

The last giant is not really failing, but a recent product disaster has cost the business both money and its chairman. Disney’s chairman Rich Ross resigned after a horror return on its latest film, John Carter. The film has become the film maker’s biggest flop, losing Disney around $200 million after costing $250 million to make. This leaves Disney with $80-$210 million in operating losses, shares down by almost 1% and a big dent in their reputation. Disney will be hoping new films this year in blockbuster Avengers and Brave will help make up for this poor showing, with both highly anticipated by audiences. Disney’s theme parks have helped boost the business and the firm should survive this flop, but they will need better returns on future projects.

So the World Bank has chosen its new president. The race was really only between two candidates, one an experienced finance minister for her country and a past managing director of the World Bank itself, the other a head of a university whose largest achievement has been as head of the HIV/AIDS department of the World Health Organisation – impressive but not the CV required for a president of the World Bank. Yet guess who won?

It was the less experienced American candidate, Jim Yong Kim. This shouldn’t be such a surprise however, for the last 70 years the position has always gone to an American, just as the top IMF position has always gone to a European. This comes from an organisation that prides itself on helping poorer countries become more democratic and less based on filling positions with friends or family, hypocrisy at its worst.

Now was the time archaic tradition could have changed, as a non-American could truly be described as the more qualified candidate. Nigeria’s Ngozi Okonjo-Iweala has experience in government, economics and finance and has managed to make progress in Nigeria’s finances – rescheduling debt payments and improving transparency. This sort of experience with a developing country could have helped the World Bank in making progress in these countries. Mr Kim however was chosen by Barack Obama to be America’s candidate and backing of the institution’s most influential partner has seen him awarded the job. It would have been a major surprise if Barack Obama hadn’t pushed an American candidate through on an election year and there are arguments that only an American could raise the capital from the USA that finances the World Bank. The choice to pick Mr Kim (born in Seoul) has also helped the USA blossom its relationship with South Korea, one of America’s biggest supporters in Asia.

Nigerian Candidate Ngozi Okonjo-Iweala, the better option?

The main problem is that no-one really knows Mr Kim’s intended policies; he has held no public discussions. Some point to a book he wrote in 2000 “Dying for Growth” where he argued that growth and corporate profits only worsen the lives of everyday people, a point of view that heavily contradicts the current policy of the World Bank – to promote growth and investment. Others suggest he advocates a focus on smaller demographic groups e.g. the poor and unhealthy rather than focusing on the bigger picture; changes in education, healthcare and justice.

In the end we will have to take solace in the fact that for once, the contest was actually a contest.

The UK is a modern country that is home to many companies, ranking 7th in the World Bank’s ease of doing business index. But a big problem facing the country and indeed other nations like the USA is that companies are dodging taxes when in the country. In 2010, Apple only paid £10 million in British taxes despite making around £6 billion in sales. A similar story was reported on Amazon, after making £8 billion in sales in the UK they have yet to pay any corporation tax. This is a common practice by the big multinationals of the world; they can escape paying a large amount of the tax as they can use foreign subsidiaries where corporation tax is much lower, like the British Virgin Islands or Ireland. In fact, Facebook chose Dublin in Ireland as the location for its international HQ, as the corporation tax was very low.

Apples cash holding vs the amount of tax it pays to the USA

The British Virgin Islands has the unusual statistic of having 457,000 active companies, a ratio of 16 companies to every citizen. A lot of these are shell companies, set up by firms to hide accounts for the main purpose of tax evasion and money laundering. This is the big problem, as firms can hide funds from the government through lots of smaller shell companies and can even use these to place bribes to officials, showing corruption is still prevalent in society. In 2011, it was reported that 25% of the FTSE 100 companies were avoiding tax through foreign tax havens, this went up to 98% using the stricter US Congress definition of tax havens. While in 2010, tax evasion cost the UK government £15 billion compared to benefits fraud, which cost just £1 billion in comparison. Switzerland, a more famous location for secret bank accounts are now being cracked down on by the likes of Germany, pushing the UK into a decision on whether to toughen its tax agreements with the country (with a clause in the current deal making it possible). This could raise an estimated £5 billion for the UK government and could be worth pushing, though secrecy laws on the income of individuals would remain intact.

This shows the British Virgin Islands has very low costs for starting businesses

George Osborne has made public his stance on tax avoidance, calling it “morally repugnant” and suggesting a concentration on this subject is in the governments mind. This could mean extra powers given to HMRC, when there is already concern on the current powers afforded for example: being able to request information on an individual from third parties (like banks) and being able to inspect business premises unannounced. The concerns are also that tax payers won’t have much protection, with the appeal system time consuming and costly. But this is a popular method of dealing with the heavy budget deficit the government needs to dig itself out of, as it will mostly be a problem for the rich and businesses – current public targets. A recent success was a blocking two tax avoidance schemes by Barclays that would have amounted to £500 million in tax revenue lost. But the recent budget also admits defeat in trying to tax the rich, as the 50p tax rate was dropped to a 45p tax rate, showing the government wasn’t confident in its ability to beat the rich and their accountants.

Gaining to many powers?

For now the wealthy individuals and firms remain slippery in the current tax system. They can afford better accountants than the government sadly and with small countries happy to offer tax havens there will all ways be a get out clause for them. But it is important that they are made to account for themselves, otherwise money that should be flowing into the government and therefore the countries itself is being cut off. This revenue for the UK is important in keeping the country running and any loss in it can have a negative effect on the rest of us as budgets are tightened. Even more so, it sends a bad message that the rich do not have any responsibility to finance the country they live in, when they should be treated as any other member of the UK.

Two nations that have seen substantial change over the last decade, Dubai and Qatar have both used the vast amounts of oil found in their countries to improve their economy, but more importantly both have realised they cannot become too reliant on a dwindling resource. They have used the money from oil sales to diversify their economies and improve conditions for the public, a stroke of genius that many other oil rich states could benefit from copying.

The year 1966 has become famous for many reasons; The World Cup win for England, the first man on the moon in USA, but for Dubai it has become famous because it was the year they first discovered oil. This changed the country beyond recognition as they grew and became a modernised civilisation. But instead of becoming dependent on their new source of revenue, they have used it to invest in different areas of their economy, namely the tourism and business sectors. A property boom during 2004-2006 was the result of Dubai increasing the value of their real estate through extravagant building projects: The Palm Islands (man-made islands), The Burj Khalifa (tallest building in the world) and Dubai Mall (one of the largest malls in the world). Dubai was the fastest growing city in the world in 2008 and a number of economic free zones (low or no tax) have seen businesses flock to the emirate. Dubai has become an important financial hub, has a world class airport and created various knowledge and silicon centres, while its heavy links to the western world and largely America make it one of the most trusted nations in the Middle East. This was a smart move to diversify their economy (an underrated yet important economic strategy) as the oil discovered was never going to last forever and now only accounts for around 5% of GDP. The oil discovered was actually relatively small and would only last around 30 years (with much of the oil now gone) so the government made a long term decision to make sure Dubai could keep progressing past this point and despite the world wide recession slowing down the economy, there is already talk of recovery.

The Burj Khalifa is the tallest building in the world, financed by the Dubai government

Qatar’s story is similar; they discovered oil in the 40’s and saw their economy explode into life, though the difference is Qatar discovered a whole lot more reserves. The country has 15 billion barrels of oil which should finance the country for another 40 years and has the third largest natural gas reserve in the world. This has seen Qatar boast a high standard of living (comparable with Western states), the second highest GDP per capita in the world and be able to have one of the lowest tax rates in the world – with no income tax. Qatar is now trying to follow Dubai’s lead in diversifying their economy, with plans to develop a knowledge economy. Projects are already under way with a “Qatar science and technology park” set up in 2004 and “Education city” set up which holds many international collages. The Qatar Financial Centre provides world class financial services for businesses including capital support, and further investment in the business sector shows willingness to broaden the economy. The hosting of the FIFA World Cup in 2022 is another big step which has put the country on the map with football fans and shows a country expanding into new areas. But the state still relies overwhelmingly on oil and gas sales, accounting for 70% of the government revenue, 60% of GDP and 85% of exports. Qatar has not quite reached Dubai’s level of diversity and still has a long way to go to develop a similar sort of reputation.

But with backing of its natural resources, Qatar can afford to takes it’s time with expansion. In fact, unlike Dubai, Qatar were resilient to the global financial crisis and in 2010 had the world’s highest growth rate. This shows Qatar has a more solid foundation to rely on compared to Dubai, who have suffered from recent fluctuations in the market and a break of their property bubbles which saw “Dubai World” (the government’s investment company) have to be bailed out by their richer neighbours Abu Dhabi. Qatar might also see an accelerated improvement in their infrastructure as the World Cup nears, with the internal transportation system needing an overhaul.

Qatar had the highest growth in 2010, near 15% and well above the global average

Both countries deserve applause for using their natural resources to diversify their global strengths, as a reliance on oil and gas would leave them exposed to any crises in those markets. It is also good long term planning as their natural resources will run out one day and they will need a new way of financing the country. Dubai were a big success a few years ago, but the recent world economic crisis had a serious effect on an economy that is now too reliant on tourism and foreign investment (both factors outside their control). For Qatar, their economy is secure, but they could free the conditions on businesses that frighten off foreign investment for example; the need for a Qatari national to own 51% of the company and the confusing laws on immigrations and social relationships that conflict with Western customs.

Humankind, victims of their own success, seems to have nowhere else to explore. Every continent is populated and travel has now become easy to the average man. Space remains the “Final Frontier” and as George Mallory summed up well when asked why he climbed Mount Everest, he replied “Because it was there”. Since the race to the moon in the late 60’s, man has not stepped on the big rock in the sky since 1972 and it is likely they never will again. Even that was an extremely unpopular decision at the time, as polls showed that 45-60% of the population thought the government was spending too much on space travel. We explore our galaxy with unmanned probes but smaller funding restricts the capabilities of space programs like NASA of truly reaching its potential. This is the cut and dry of it, space travel is now seen as a luxury few can afford and risks being neglected for more pressing matters.

The unknown path of space travel

No-one on Earth, not the richest among us, can just leave the planet. The lack of profit and exuberant costs means no private industries will ever finance such exploration. The length of such a project could easily outlast the company financing it and technological problems mean the finish line could keep shifting further away. Nations, or more likely a cluster of nations remain the only plausible sponsors of space programs, but they face problems of their own. Single governments face the ever need to balance their budgets and public demand pushes space travel further down the list. While an alliance between nations would face constant unrest as countries fought for their best interests over their rivals. The real push for space travel will be when the planet we live on no longer remains a viable home – be it through war or our inevitable use of finite resources.

The end of the world could push mankind into space travel

The main problem is that space travel seems so far off being possible, that it strains to remain in the public eye and therefore loses backing. Looking at figures in USA from 2006, the government spent around $7 billion a year on space programmes, this may sound like a lot but when you consider they spent around $10 billion a month in Iraq then you can see so much more can be done. It doesn’t help that current projects like Virgin Galactic are now selling flights around the orbit of the planet to those rich enough to afford it, reinforcing the perception that space travel is now more of a luxury. But further investment is very much needed in the research being carried out. Space travel has short term benefits as well as long term, encouraging more kids into studying science and engineering as well as supplying the government with new income e.g. Many NASA products have become household products (memory foam pillows, water filters). In fact the landing on the moon is said to have sparked the craze of miniaturisation in technology leading to products like mobile phones. Despite this, the percentage of spending on space travel has dropped from 4.4% in 1966 to just 0.5% last year, showing a clear decrease in the motivation to finance space programs like NASA.

NASA’s budget cut by half in the last two decades

But there have been improvements in the market, SpaceX is one of them. A privately run rocket company that is very efficient and ambitious, so much so that NASA started outsourcing to the company in 2008. This could be the way forward, as private firms could start moving into the industry and bring in more finance as well as new methods for working out problems. Another improvement has been the planned Space Elevator, a structure that could transfer material up into space without using rocket ships. This is an idea being pioneered by Google in its X labs and could become reality in the next decade, showing how creative private firms could hold the answer to solving the world’s problems in space.

Google Space Elevator

But more importantly humankind should see that exploration into space is in its long term benefits. This requires a united global effort that surpasses national interests and plants the seeds for future expansion of humans into new realms yet to be explored. This seems unlikely in a world that is splintered by political agenda’s but if it could be achieved, could lead the world into a more unified planet in more ways than the space program.

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Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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